When Bitcoin was first released in 2009, its creator gave units of the digital currency away via lotteries every ten minutes. Hopefuls had to solve an algorithmic puzzle to get a lottery ticket. Back then the equations were solvable on standard laptops. But as the currency has proliferated, supercomputing power is now needed to unearth it in an effective fashion.
China has built the world’s fastest supercomputers and the Chinese now mine 70% of the world’s Bitcoins. These “mines” belong to private companies which operate with minimal regulation. The forecast is that the upper limit of 21 million Bitcoins will be in circulation by 2040, meaning miners will then have little incentive to continue. But in the meantime they provide a valuable function, helping to increase the supply of Bitcoin, even as the processing power required to generate new coins continues to escalate.
Because Bitcoin mining is an energy-intensive process, the mines are often established close to cheaper suppliers of electricity, such as hydroelectric dams. In Mabian Yi Autonomous County in Sichuan province, one such mine – operating from a warehouse with 6,000 computers – was a customer of the Bajiaoxi dam. “Every month they would pay our plant over Rmb1 million ($147,015) in electricity fees. That’s Rmb12 million a year!” a supervisor at the dam’s hydropower station told NBD.
Earlier this year the mine closed, delivering a blow to the dam’s finances. Local media said the shutdown was all the more peculiar in the wet season, when electricity prices are cheaper. Plus the value of Bitcoins has been rising rapidly, up about 200% this year to almost $3,000. NBD reports that the mine in Sichuan was extracting about 27 coins a day, which would have promised substantial revenues.
The speculation is that the miners moved on after pressure from the local authorities. “Local Bitcoin miners say they were not forced to relocate, but they are reluctant to talk more about the shutdown,” the People’s Daily reported, adding that a local official had explained that the closure was part of efforts to tackle “illegal cash operations” and control “systemic risks”.
Most of the regulation of the Bitcoin industry has targeted trading platforms, where the cryptocurrency can be converted into traditional tender. When Bitcoin first gained popularity in China it was postulated that holders of the currency saw an opportunity to circumvent restrictions on overseas remittances (see WiC351) and two major trading sites stopped allowing customers to “withdraw” their Bitcoins (i.e. convert them into other currencies) in February, following pressure from the central bank, the People’s Bank of China (PBoC).
The moratorium was lifted at the end of May, supposedly following approvals from the PBoC, Reuters reports.
New legislation for trading Bitcoins is expected this month but Shanghai-based CBN says there are still no plans to regulate the mines that make the digital currency. Experts like Zhang Jun, a senior analyst at Tai Cloud Research Institute, contend that Bitcoin miners would welcome a little more oversight. “Miners actually want regulation, so their rights and obligations are written in black and white and they have no need to hide from regulators,” he said, saying that the current climate is too unpredictable.
Finance Magnates, an information resource on electronic trading, also thinks more regulation might increase acceptance of cryptocurrencies around the world. In a previous interview, the chief technology officer at Hapoalim, Israel’s largest bank, told Finance Magnates that the Chinese miners needed to come out of the shadows, and that uncertainty about the country’s Bitcoin mines was one of the reasons why banks were reluctant to accept the medium. “Do we want to be at the mercy of the Chinese who could be manipulating the whole thing?” he asked.
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